Mountains reflected on the surface of the Dead Sea close to En Gedi, Israel. Photograph: Oliver Weiken/EPA

Israel, Jordan and Palestine have signed an agreement on an ambitious and contested project to replenish the rapidly shrinking Dead Sea by transferring in water from the Red Sea along a 110-mile pipeline.

Israel's energy and infrastructure minister, Silvan Shalom, said it was "a historic agreement that realises a dream of many years... [and] is of the highest diplomatic, economic, environmental and strategic importance." He and the Palestinian and Jordanian water ministers, Shaddad Attili and Hazem al-Nasser, attended a signing ceremony at the headquarters of the World Bank in Washington on Monday.

The proposed pipeline will help to slow the dessication of the Dead Sea, which is famous for its high levels of salt and other minerals that allow bathers to float on its surface. "The inflow of water from the Red Sea will slow the drying up of the Dead Sea," said the Israeli government. Desalinated water from the Red Sea will also be supplied to the cities of Eilat in Israel and Aqaba in Jordan for human consumption.

But analysts said the deal would create a vastly scaled-back version of a grandiose project that had been under consideration for almost 20 years. They said it would provide about a 10th of the volume of water needed to stabilise the Dead Sea, while threatening its unique characteristics, and would not alleviate severe water shortages in the area.

Under the agreement, 200 million cubic metres of water will be pumped from the Red Sea a year. Half will be desalinated at a new plant in Aqaba, at the northern tip of the Red Sea, and the rest will be piped to the Dead Sea to help replenish its waters, which are shrinking by a metre each year.

Construction of the pipeline, which will be laid on Jordanian territory, is likely to take up to five years and cost up to £400m. Israel will sell water from the Sea of Galilee to Jordan and desalinated water to the Palestinians.

Map of the Dead Sea

The Dead Sea lies more than 400 metres below sea level. It is a magnet for tourists who go to float in its mineral-rich waters and smother themselves with the dense black mud that forms its bed.

Its eastern shore is in Jordan and its western side sits under Israeli control, although about two-thirds lie in Palestinian territory in the West Bank. In addition to tourism, global sales from Ahava Dead Sea Laboratories, an Israeli firm that manufactures Dead Sea beauty products, are worth around £100m a year. Palestinians are denied access to the economic potential of the Dead Sea.

Water levels have been declining for about 40 years, the lake's surface area has shrunk by 30% in the past two decades and thousands of sinkholes have appeared on its shore. The main cause of the decline is the appropriation of more than 90% of water from the river Jordan to the north for agricultural and domestic use by Israel, Syria and Jordan. The commercial and industrial extraction of vital minerals from the sea itself has also played a part.

The idea of pumping water from the one sea to the other – a project known as theRed-Dead Conduit, or Two Seas Canal – has been criticised by environmentalists who argue that the introduction of Red Sea water containing living organisms could have a catastrophic effect on the unique characteristics of the Dead Sea.

Experiments to mix water from the two seas have produced disturbing changes to its biological and chemical composition, with the growth of algae and colour changes caused by blooming bacteria.

Friends of the Earth Middle East (FoEME) has criticised the Red-Dead project as playing with nature and failing to address the root causes of the decline of the Dead Sea.

The project would supply less than 100m of the 800m cubic metres of water needed each year to stabilise the Dead Sea at current levels. "This is a way of saving face rather than saving the Dead Sea," said Gidon Bromberg, of FoEME.

Eran Feitelson, professor of geography and public policy at the Hebrew University in Jerusalem, said he had not seen details of the agreement but "it looks as though it's a very far cry from the project that was previously talked about".

The distribution of water in the region is a contentious issue, with most of the underground aquifers in the West Bank under Israeli control. The Palestinians say they are severely deprived of water resources compared with Israeli settlements in the West Bank. Feitelson said water shortages in Jordan were much worse than in either Israel or the Palestinian territories.